The Politics of Recovery

In no place in It’s a Wonderful Life is political conflict so thoroughly replaced with magical thinking than in the bank run scene, set in 1932. At that moment, George faces an angry crowd clamoring for its money to be handed over immediately, before the building and loan succumbs (without realizing that they were hastening that closure by their panic). Bailey then delivers an impassioned explanation of how such an institution works. The power of that scene is such that we almost forget that George Bailey’s version of an FDR fireside chat is not, in the end, what saves the day. Instead, Mary Bailey fortuitously appears and donates the couple’s $2,000 honeymoon nest egg (almost $34,000 in 2017 dollars) to keeping the Bailey Building and Loan solvent, or, more precisely, within exactly two dollars of outright failure (“CPI Inflation Calculator”).

Today, in the aftermath of the Great Recession, some of those who have been trying to explain how liquidity is restored to a capital-parched financial system—including then–Federal Reserve chairman Ben Bernanke and then–secretary of the treasury Timothy Geithner—have referred to the bank run scene in It’s a Wonderful Life to explain how pump-priming (the injection of capital) can provide the stimulus to reinvigorate a depressed economy (Bernanke, Federal Reserve 5–7; Geithner 8, 390).

In the most obvious sense, Capra’s portrayal of a bank run leaves out the role that government (and thus politics) played in restoring momentum—however slowly—to the private economy in times of hardship. Banks trying to survive the severe economic blows between the stock market crash of October 1929 and Franklin Roosevelt’s inauguration in March of 1933 had to rely on the Federal Reserve to play the role assigned to Mary Bailey by Capra and his screenwriters. Some member banks were able to protect the liquidity of fundamentally sound institutions as they weathered a temporary shortfall. Generally, however, the scope of the crisis overwhelmed the capacity of the system created to address it.

For an especially vivid sense of how one branch of the Federal Reserve intervened at the local level to save well-run institutions made vulnerable by economic and social forces beyond their control, I am indebted to the Utah banker Marriner Eccles, who was eventually appointed to head the Federal Reserve system by FDR. In his 1951 memoirs, Eccles give us his own version of a bank run scene (without any mention of the scene pictured five years earlier in It’s a Wonderful Life), in which he must calm a panicky mob whose sudden withdrawals might not only sink the Ogden State Bank, but also bring down all the branches of the First Security Corporation:

Marriner Eccles

Mounting the counter, I raised my hand and called for attention: “Just a minute. . . . I want to make an announcement. It appears we are having some difficulty handling our depositors with the speed to which you are accustomed. Many of you have been in line for a considerable time. I notice a lot of pushing and shoving and irritation. I just wanted to tell you that instead of closing at the usual hour of three o’clock, we have decided to stay open just as long as there is anyone who desires to withdraw his deposit or make one. Therefore, you people who have just come in can return later this afternoon or evening, if you wish. There is no justification for the excitement or the apparently panicky attitude on the part of some depositors. As all of you have seen, we have just had brought up from Salt Lake City a large amount of currency that will take care of all requirements. There is plenty more where that came from.” (This was true—but I didn’t say we could get it.) “And, if you don’t believe me . . . I have here Mr. Morgan Craft, one of the officers of the Federal Reserve Bank, who has just come up in an armored car. Mr. Craft, say a few words to the folks.” Morgan Craft, Deputy Manager of the Salt Lake City branch of the Federal Reserve Bank, stepped forward: “I just want to verify what Mr. Eccles has told you. . . . I want to assure you that we have brought up a lot of currency and there is plenty more where that came from.” This, again, was perfectly true. But he didn’t say the currency belonged to us. . . . In a split instant the faces before me relaxed in relief. The edge in all voices seemed to vanish. Some people stepped out of line and left the bank (Eccles 60–61).

Even before the New Deal formalized this procedure of stabilizing the banking system by backing deposits with federal insurance, such action—collaboration between private institutions and between public and private enterprise—not only saved this institution (and the First Security Corporation of which it was a branch) but others as well.

Herbert Hoover

This process of recovery was also helped by some of the actions taken by President Roosevelt’s predecessor, Herbert Hoover. According to one historian of the thrift industry, “Herbert Hoover knew more about savings and loan associations than any other person who has ever lived in the White House” (Ewalt 49–50) As a result of his own expertise, Hoover advocated for the creation of a Federal Home Loan Bank, which prefigured Roosevelt’s Federal Deposit Insurance Corporation. The fortuitous intervention of Mary Bailey also omits other dramatic examples of collaboration between savings and loans, and savings and loans and banks, to prevent the total collapse of local economies (Eccles 62–69; Ewalt 17–18, 50–55). While these local responses were impressive, the fact remains that they could not provide the degree of economic intervention that would have returned the national economy to health.

Until the Great Recession of the twenty-first century, the Federal Deposit Insurance Corporation (FDIC) was one of the most quietly effective and visible symbols of the continuing importance of the New Deal in day-to-day life in the United States. Writing more than fifty years ago, economists Milton Friedman and Anna Jacobson Schwartz (who each opposed the New Deal’s expansion of federal intervention in the economy), provided a fitting description of how the FDIC guarantee of all deposits up to $10,000 (only 57 percent of the deposits in insured banks) created a system of supervised stability, which “means that all deposits are effectively insured” (Friedman and Schwartz 437). The FDIC’ s annual reports to Congress over the years also confirm that the wrenching experience of the Great Depression did not leave the future generation of bank officials with a greater fund of wisdom or integrity, nor had there been a vast increase in regulatory oversight from government; insured banks that got into trouble were generally caught early enough that they could be merged with healthier banks, with a confidence that the FDIC would cover the “depreciated assets” (Friedman and Schwartz 440).

John Maynard Keynes

We cannot leave the subject of recovery as portrayed in It’s a Wonderful Life without finally considering its relationship to economic stimulus on a national scale, a strategy most famously advocated by the British economist John Maynard Keynes. Keynes, a renowned academic economist, nonetheless shared in Marriner Eccles’s pragmatic belief that an economic depression could only be ended by the federal government intervention on a scale strong enough to coax the return of private capital and consumer confidence. During the depression, Keynes made the case against further cuts in public spending in Britain by reminding a BBC radio audience of what the laws of classical economics assumed, and then comparing that to the actual situation before their country:

The object of saving is to release labor for employment on producing capital goods such as houses, factories, roads, machines, and the like. But if there is a large unemployed surplus already available for such purposes, then the effect of saving is merely to add to this surplus and therefore to increase the number of the unemployed. Moreover, when a man is thrown out of work in this or any other way, his diminished spending power cases further unemployment amongst those who would have produced what he can no longer afford to buy. And so the position gets worse and worse in a vicious cycle (Moggridge 61).

In a rhetorical turn that Franklin Roosevelt, Keynes’s reluctant student in depression economics, would certainly have admired, Keynes then compared his nation’s economy to an atrophying human body:

The patient does not need rest. He needs exercise. You cannot set men to work by holding back. . . . On the contrary, activity of one kind or another is the only means of making the wheels of economic progress and of the production of wealth go around again (Moggridge 64).

This historical background enables us to perceive the symbolic importance of the $2,000 in Mary Bailey’s purse in more vivid historical resolution. She is doing much more than saving the family business—she is performing the Keynesian equivalent of turning water into wine, transforming once private savings into a public resource to preserve the economic and social cohesion of Bedford Falls.

In the nation that has come to enjoy this story, history moved along a more difficult path. Not until the requirements of mobilizing the entire economy for World War II did public taxing and spending take place on a Keynesian scale, enabling the economy not only to recover but also expand in a sustained fashion (Krugman, Return of Depression Economics 29–102; Krugman, End This Depression Now! 38–40). Even as he pulled the levers of public spending during the early New Deal, Eccles reports that Roosevelt “threw up his hands in horror” at the many modest infusions required to pull the nation up and out of a deep trough of suffering, relenting only when reminded of how each expenditure contributed to a larger recovery (Eccles 145).

When the Great Recession hit with its greatest force in 2008–2009, the rescue effort followed the precedent set in the Great Depression. As in the Great Depression, the federal infusions of capital to large banks did not move out as smoothly to smaller banks as expected; the speed with which the crisis grew and worsened led to administrative improvisations, which even as they brought stability also missed opportunities to maximize the positive impact to those most in need of help (Bernanke, Essays 64–65; U.S. Congressional Oversight Panel, March Oversight Report 55–58; Office of the Inspector General 100; Geithner 376–81). In addition, the political economy of the United States and other nations had grown vastly more complex in the years since Keynes first propounded his economic theory: central governments now had far larger fixed social commitments and thus could not as easily manipulate taxing and spending levels as Keynes had first supposed (Greider 333).